Across The Border

Majority of PSBC’s investors are cornerstones, a concerning trend for IPOs, say experts

Bank’s six cornerstone investors have subscribed around 75pc of the planned H-shares, set on Wednesday at an offer price of HK$4.76

PUBLISHED : Wednesday, 21 September, 2016, 1:23pm
UPDATED : Wednesday, 21 September, 2016, 10:32pm

State-owned Postal Savings Bank of China (PSBC) launched the world’s largest initial public offering this year, with the vast majority of the deal covered by cornerstone investors, raising concerns that there may be too many cornerstone investors being used in market flotations.

Critics say that large investments by cornerstone investors may push up the offer price and hurt liquidity for IPOs once the shares start trading, as the stock is locked up for a minimum of six months, leaving few remaining H-shares tradable during the period.

The cornerstone money can also pressure the stock as the expiration of the lock-up period nears.

China’s largest bank by number of branches has set the offering price at HK$4.76, near the low end of the indicative range after its offerings got “full, but not great” subscription, people familiar with the matter told the Post. The trading debut is slated for September 28.

Seeking up to HK$62.7 billion in the share offering – the biggest since Alibaba Group’s $25 billion listing two years ago – PSBC’s six cornerstone investors have subscribed around 75.1 per cent of the H-shares, representing 11.3 per cent of its total issued share capital, according to its prospectus.

CSIC Investment One, an overseas investment and financing platform of China Shipbuilding Industry Corporation, and Shanghai International Port Group (HK) are the biggest cornerstones, each subscribing approximately 17 per cent of shares.

“Some SOEs want to set the offer price at a high level which is not attractive for international investors, so they invite ‘national team’ investors to show support,” Joseph Tong, chairman of Morton Securities said.

The price to book ratio of PSBC is 1.02-1.13 times, based on its indicative price range of HK$4.68-$5.18.

This is expensive comparing with an average P/B ratio of 0.76 times of Hong Kong-listed mainland banks, according to a research report by Daiwa.

For jumbo-size share sales of mainland companies, cornerstone placements ensure subscribers amid volatile capital market sentiment, says Edward Au, co-leader of the national public offering group at Deloitte. They also help stabilise share prices after shares start trading, thanks to the lock-up mechanism.

Cornerstone investments reduce the supply of shares, thus allowing the offer shares to be sold at a higher price
Andrew Lam, Hong Kong director at BDO International

Hong Kong was the world’s largest IPO market in the first half of this year, and last year, based on total funds raised, and the biggest IPO deals this year have been supported by large compositions of cornerstone investors.

Zheshang Bank raised HK$11.6 billion earlier this year, which will be second largest IPO in the city following PSBC, and half the offering was taken up by cornerstones, according to data from Wind Information.

The third largest offering of the year, Everbright Securities Company, had 65.1 per cent of the shares subscribed by eight cornerstone investors, with China Shipbuilding Industry Corp and China State Construction Engineering Corp also among the largest buyers.

China Development Bank Financial Leasing, listed in July, had 77.5 per cent of its offerings secured by cornerstone placement and Bank of Tianjin had 56.5 per cent.

“Cornerstone investments reduce the supply of shares, thus allowing the offer shares to be sold at a higher price,” said Andrew Lam, Hong Kong-based director at accounting firm BDO International.

These investors promise to subscribe the shares at the higher end of the indicative range if needed, which also encourages the company to set the price at high level, Lam added.

A large composition of cornerstone investors may also cause lower trading of new listings, making the stock market inefficient and the share price unable to reflect its fundamentals, Lam said.

Daily share turnover of Zheshang Bank, listed in March, was as low as HK$4,000 in July, while Bank of Tianjin’s daily turnover even hit HK$3,625 last month.

If the cornerstone investors have no synergy with the business or if their main activity is not investment funds, they do tend to offload the investments after the lockup period.

Low daily trading volume may even force cornerstones to sell shares at a discount, Lam said, while sudden increases in the numbers of shares available in the free market could also drag down prices.

Although the existence and allotments of cornerstone investors are normally mentioned in the offering documents, the information should be made a lot more prominent, he added, as retail investors may not have noticed those before subscribing.

Deloitte’s Au said market consultation regarding how to balance the composition of cornerstone investors and lock-up period should be introduced.

“The subject [of cornerstone investors] is the sort of issue that should be taken up by the Hong Kong’s Listing Policy Committee,” said Sally Wong, chief executive of Hong Kong Investment Fund Association’s Secretariat.

The Listing Policy Committee is one of the two committees that is proposed under SFC and HKEX’s listing reform consultation.

Ken Wong, Asia equity portfolio specialist at Eastspring Investments, said that besides being given unattractive valuations, nearly two thirds of firms underperform the Hang Seng Index within one to three years after their debut.

“The biggest problem right now is how can investors be assured that more high quality companies are being listed in Hong Kong,” he said.